Critical notes hotel valuations in Indonesia

Better understand hotel investment-particularly hotel investment valuation, share personal experience with hotel investment and valuation, ability to relate the theory in valuation of income producing assets with practices and trends in the market.

Characteristics of hotel investments: real estate and business; real estate encumbered with hotel management with potential “good will” or brand equity or liability; real estate-land, brick and mortar; higher risks – only few from rental contracts, mostly subject to daily risks and opportunities; seasonality of demand; sales (revenue) with fluctuation-month of the year or days in the week; while property is location specific; hotel is more universal in reporting uniform system of accounts for easy benchmarking; multiple classifications and hotel category with different investment; characteristics; from budget class to ultra luxury / from themed hotel to boutique.

Real estate and business hotel/resort: hotel as operating business, key commodity (guestroom)-is sold on daily basis with demand shifts, multiple sources of revenue that are dependent on internally generated demand (food outlets, spa, meeting rooms etc), various service costs (transportation, guest loyalty programs) etc, different management or chain affiliations- impact on efficiencies; hotel as real estate assets, complex physical plants-24 hour operation, physical obsolescence (difficult to anticipate), Indirect real estate value (in a mixed used development), changing environment (change in accessibility etc); management agreements, if a hotel is encumbered with management agreements it has relatively, limited pool of potential investors/buyers, mindful of key commercial terms, length of the agreement, termination clauses performance clauses, first right of operator to acquire transferability.

Indonesian hotel investment characteristics: limited transactions (Indonesia is a tightly held market); discounted cash flow valuation versus depreciated replacement cost; information is predominantly held by major brokers or among investors; cycles in hotel trading performance; relatively longer cycle; immature investment market with limited knowledge on potential value; hotels with encumbered by management agreement vs. vacant possession; importance of hotel management on reaching the right target guests; transparency of financial information; new ownership structure for hotels/resorts condotel with multiple owners and revenue share to developer; HGB on HPL or Hak Milik Titles (BOT or leasehold with titles); potential market values based on highest and Best Use valuer/appraisers beware of market value.

Issues with discounted cash flow analysis in Indonesia: it is not easy to determine of discount rates and capitalization rates; Limited transactions to obtain discount rate and capitalization rate from the market; Clues are taken from other property classes or even other investment class (government bonds for example) with subjective premiums; Owners generally benchmark against replacement costs; Relatively high land prices (especially in Jakarta’s CBD); Generally inflated construction costs; Investors, particularly institutional investors, tend to favor pure Income Approach disregarding owners’ background and potential highest and best use; Institutional investors may represent majority of demand in key gateway cities in Indonesia.

Notes: By end of 2010 there were 33,000 hotels with over 500,000 guestrooms from 10 international hotel management companies having over 75 brands of different positioning.

Conclusions; importance of understanding the subject property, trading and investment; market characteristics and the concept of highest and best use; importance of understanding the market cycle and the trend in value – when to use the reference of replacement costs; Importance in understanding the tenure of hotels being valued, importance of not only mastering the techniques but also the understanding the uses of various definitions, methodologies, and assumptions accepted by Indonesia valuer.

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